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Exclusive Interview with Ary Rosenbaum: The 3 Biggest Compliance Obstacles for 401k Plan Sponsors

March 13
00:26 2012

Long time readers of will quickly recognize the name of Ary Rosenbaum, whom we often turn to when we’re in need of a quick quote on legal matters within the fiduciary realm. Rosenbaum is an ERISA/retirement plan attorney ary_rosenbaum_300for his firm, The Rosenbaum Law Firm P.C., located in Garden City, New York. Charging only a flat fee, he helps plan sponsors reduce their plan cost, facilitate administration, and limit their fiduciary liability.

Rosenbaum is an oft-quoted expert in retirement plans, having appeared, besides in, in Fortune Magazine, The Stamford Advocate,,, Long Island Business News,,, American Express Open Forum,, Pittsburgh Post-Gazette, The Wall Street Journal and Investment News. He’s also a prolific writer whose articles have been made available in numerous publications. Rosenbaum has written more than 90 articles for his blog. He’s also a well-respected speaker, having been invited to make presentations at venues throughout the country.

He is a graduate of Stony Brook University (B.A., Political Science, 1994), American University Washington College of Law (J.D., 1997), and Boston University (L.LM, Taxation, 1998). He is licensed to practice in New York, Massachusetts, and California and is currently an accredited provider of continuing education for New York accountants and attorneys. He lives in Oceanside with his wife and 2 kids.

With this impressive resume, we thought Rosenbaum would be the perfect person to interview about state and federal regulatory matters as they pertain to retirement plans. As you read the interview, you’ll see his advice is both succinct and practical, a testament to his on-target real-life work experience. Now, we know of his work experience, but we thought our readers might be impressed to learn more of what’s beyond the standard bio.

FN: Ary, first off, thank you very much for being available for a quote at a moment’s notice. Both we and our readers appreciate your insights and forthright comments. Tell us how you gained such a breadth of knowledge about retirement plans.
Rosenbaum: While I do have an L.LM in taxation and took two courses on retirements plans at Boston University School of Law, I learned how retirement plans truly operate while working for 9 years as an attorney for third party retirement plan administration firms.

FN: So you actually worked in the practical side of the business. How does this compare to the experience of the typical ERISA attorney and what did you discover there?
Rosenbaum: Many ERISA attorneys have spent their entire career at law firms with very little experience in the day to day administration of retirement plans. I had hands-on experience in seeing many of the issues and problems retirement plans go through on a daily basis. It is this experience where I saw the abuses of the retirement plan industry that has made me a leading supporter of 401k fee transparency, as well as cutting down a plan’s sponsor cost and potential liability because I know the tricks of the trade. While ERISA and retirement plans are a complicated topic for most plan sponsors, I’ve learned how to break down important and technical concepts into a language plan sponsors can understand.

FN: As you know, ERISA was passed in 1974 – almost two generations ago. No doubt some of today’s plan sponsors weren’t even born yet. What is the nature and purpose of ERISA? What are the most important elements that came out or ERISA?
Rosenbaum: The nature and purpose of ERISA is to protect the rights of retirement plan participants and to make sure employers meets their obligations as retirement plan sponsors. Under ERISA, retirement plans must provide for vesting of employees’ pension benefits after a specified minimum number of years. ERISA also requires the employers who sponsor plans to satisfy certain minimum funding requirements. In addition, ERISA created the Pension Benefit Guaranty Corporation (PBGC) which provides coverage in the event that a terminated defined benefit plan does not have sufficient assets to provide the benefits earned by participants

FN: So ERISA appears to have initially focused on pension plans (and traditional profit sharing plans). Yet it spawned the 401k plan. What is the nature and purpose of the 404(c) provision of ERISA?
Rosenbaum: The purpose is to have the employer minimize their fiduciary liability if participants elect the investments under their account, usually under a 401k plan.

FN: What’s the most important thing to know about 404(c)?
Rosenbaum: 404(c) isn’t a suicide pact, meaning that plan sponsors have obligations under a participant directed plan. Giving participants a choice of [at least three] investments options isn’t enough. The plan sponsor has to develop an investment policy statement (IPS), review the investment options to make sure it still meets the requirements of the IPS, and offer participants investment education so they have the background to make informed investment options.

FN: Under what circumstances can 401k plans offer only three equity funds and still comply with 404(c)?
Rosenbaum: They have to be different, internally diversified investment options with materially different risk and return characteristics.

FN: What does it mean to elect the “Safe Harbor” provision?
Rosenbaum: It means the plan sponsor of a 401k plan has elected to make mandatory full vesting contributions in order to automatically pass the Top Heavy, Actual Deferral Percentage, and Actual Contribution tests. The “Safe Harbor” provision is usually elected when plans have failed discrimination tests in the past or are on the verge of failing.

FN: In what started as individual states passing their own Prudent Investor Acts, we now have a Uniform Prudent Investor Act. What is the nature and purpose of the Uniform Prudent Investor Act?
Rosenbaum: The Act allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. So a fiduciary’s performance is measured on the performance of the entire portfolio, rather than just individual investments.

FN: The Prudent Investor Act allows plan sponsors, among others, to reduce their personal fiduciary liability by hiring an investment professional. Explain to what extent this reduces fiduciary liability and whether anything can be done to fully eliminate fiduciary liability?
Rosenbaum: You can never fully eliminate fiduciary liability, you can only minimize it. The most important way to minimize liability (other than liability insurance) is to hire an investment adviser for the plan who can help guide the plan sponsor and assist in the management of the fiduciary process. An ERISA (3)(38) fiduciary can further minimize liability because, unlike a regular investment adviser, the (3)(38) fiduciary has the discretionary authority over the plan, which means they assume the bulk of the liability.

FN: If a plan sponsor hires a bank as a full discretionary trustee, will this fully remove the plan sponsor’s fiduciary liability?
Rosenbaum: Absolutely not. A discretionary trustee is effective when no individual from the plan sponsors wants to serve as trustee or the plan wants to qualify for a limited scope audit (if it requires an audit). It does not eliminate the plan sponsor’s liability.

FN: What is the nature and purpose of the 2006 Pension Protection Act (PPA)?
Rosenbaum: This legislation requires companies who have underfunded their pension plans to pay higher premiums to the PBGC and extends the requirement of providing extra funding to the pension systems of companies that terminate their pension plans. It also provides statutory authority for employers to enroll workers in 401k plans automatically; formerly, the authority came from DOL rulemaking. The PPA helped establish safe harbor investments, also known as Qualified Default Investment Alternatives (QDIAs), to protect employers from liability of losses suffered by automatically enrolled employees. It also allowed for service providers to offer investment advice to plan participants (although the DOL just finalized these rules in December, 2011).

FN: What is the most misunderstood aspect of the 2006 PPA?
Rosenbaum: It actually had the effect of employers mothballing their pension plans. In addition, the QDIA and automatic enrollment rules only added to the plan sponsor’s burden.

FN: How are 401k plan sponsors most likely to make a mistake under the 2006 PPA?
Rosenbaum: They are unaware of their obligations, so they may not offer a QDIA which can help minimize their liability.

FN: In December of 2011, the DOL issued its final guidelines for individual participant advice as allowed in the PPA. What does this new rule allow 401k plans to do that they weren’t able to do before?
Rosenbaum: It allows their plan provider to provide investment advice, as long as they meet the obligations of the regulations and get audited annually. Previously, plan providers could only offer general, investment education.

FN: Why should or should not an ERISA plan have an Investment Policy Statement?
Rosenbaum: They should have one because it’s an important cog of the fiduciary process and helps minimize liability.

FN: Besides the plan document, summary and an Investment Policy Statement, can you provide some examples of what good documentation might look like?
Rosenbaum: Minutes of any meetings where decisions concerning the plan are made as well as a review of plan providers for cost and adequacy of services. Also, every 6-12 months, there needs to be an investment review to make sure the plan still meets the IPS. In addition, every 1-3 years, the plan should have a review of their plan terms, administration, and cost as a check-up of the plan’s overall health.

FN: What are the legal guidelines as they pertain to employee communications?
Rosenbaum: Participants need a copy of the summary plan description and a quarterly (if plan is daily valued) or annual statements of benefits. They must also be informed of any plan amendments to decisions to curtail benefits or plan termination.

FN: What are the three biggest obstacles you’ve seen that can hinder a plan sponsor’s ability to fully comply with all relevant retirement plan laws?
Rosenbaum: 1) Employer’s lack of sophistication in handling their role as plan sponsor and total reliance on their plan providers; 2) Lack of independence among their plan providers; and, 3) Lack of experience or competence among plan providers.

FN: Where do you see the greatest need for ERISA attorneys in today’s retirement plan environment?
Rosenbaum: The greatest need is for small to medium sized employers who are paying too much in fees and have plans that are out of compliance.

FN: Regarding the future regulatory environment, what should plan sponsors expect to see in the next year or so?
Rosenbaum: Within the next twelve months, plan sponsors should expect to see more competitive plan administration fees as well as more litigation for plan sponsors who don’t handle their responsibilities competently.

FN: Thank you very much Ary for your thorough explanation of these sometimes complex and confusing regulatory areas. As always, it’s been a pleasure talking to you. We’re sure readers have benefited from your experience and suggestions. Thanks and continued success in your quest to help plan sponsors!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jim Watkins
    Jim Watkins March 13, 11:34


    Excellent interview. As usual, Ary right on target with his comments, especially regarding the three biggest obstacles to compliance and the potential for increased litigation. Unless and until plan sponsors realize the importance of independent and objective advice and meaningful education programs for participants, sponsors simply increase their potential liability exposure.

  2. Terry Martine
    Terry Martine April 04, 20:40

    Great article. It’s especially helpful regarding fiduciary liability. Not many articles point out the distinctions between plans.

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